Question

Credit cards are widely accepted for purposes of exchange, yet they are not money. Why not?

Short answer

Credit cards are not considered money even though they are widely accepted for exchange because unlike money, credit cards do not hold intrinsic value and are not a unit of account or a store of value. They are instruments to borrow money, not money itself.

Step-by-step solution

Define Money

Let's start by defining what money is. Money is a medium of exchange that is widely accepted in transactions for goods and services. It is also a unit of account and a store of value.

Define Credit Card

Now, let's define what a credit card is. A credit card is a payment method that allows users to borrow funds to pay for goods or services. Credit cards are issued by financial institutions.

Comparison

By comparing money and credit cards, it is clear that even though credit cards are widely accepted for the exchange of goods and services, they are not money. This is because credit cards do not hold value themselves - they are a method to borrow money, rather than a store of value. They are also not a unit of account as they simply facilitate the transfer of money.

Key concepts

Medium of Exchange

Understanding the role of a medium of exchange is key to deciphering the utility of money in regular transactions. Money, in its essence, has to be widely accepted for transactions involving goods and services. It acts as an intermediary instrument, preventing the complications that arise from the barter system, such as the double coincidence of wants.

For instance, if you intend to purchase a book, money provides a convenient and efficient way to do so, compared to bartering with goods or services of equivalent value. While credit cards are used in transactions, they represent a promise for future payment, essentially deferring the actual exchange of money. They are tools that facilitate transactions but are not, in themselves, a final medium of exchange since the payment still has to be settled through real money.

Thus, understanding credit cards as distinct from money itself - where they act as a conduit rather than an actual medium - allows us to better grasp their functionality within financial ecosystems.

Unit of Account

A unit of account is a standard numerical unit of measurement that provides a consistent way to valuate goods and services, allowing for comparison and accounting. Money serves as a common yardstick by which we measure economic value, facilitating decisions on spending, saving, and investing.

In the same book purchasing scenario, the price of the book is expressed in a monetary unit (such as dollars or euros), enabling you to assess its value against your personal financial means or other books. Credit cards, on the other hand, do not act as a unit of account. Instead, they provide access to a loan that can be used to settle transactions denominated in the actual unit of account - money. The credit card itself does not have a value attached to it; it's the money behind it that carries the value, emphasizing the distinction between the function of credit cards and what constitutes real money.

Store of Value

A store of value is an attribute of money that allows it to retain worth over time, affording it the capacity to be saved and retrieved in the future while maintaining value. Money should hold its value unless there are external influences like inflation that may erode purchasing power over time.

To preserve the earned value from your endeavors, you may save money, with reasonable assurance that it will maintain its value for future use. Although credit cards can help manage finances, they do not themselves embody a store of value. They are linked to the credit provided by financial institutions, subject to interest rates and other terms that influence the actual money's value. Credit cards deal with the facilitation of spending and borrowing, unlike money, which is meant to be retained as an asset. Therefore, the concept of money as a store of value cannot be attributed to credit cards, highlighting their dissimilar nature.